Southern District of New York Denies SEC’s Motion to Strike Affirmative Defenses of Former Cannabis Company CFO
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Southern District of New York Denies SEC’s Motion to Strike Affirmative Defenses of Former Cannabis Company CFO
The U.S. District Court for the Southern District of New York denied the SEC’s motion to strike certain affirmative defenses of the former CFO of cannabis company Acreage Holdings, Inc. In its complaint, the SEC alleges that the CFO orchestrated a series of fraudulent financial transactions designed to artificially inflate Acreage’s cash balance, in violation of Section 13(b) of the Securities Exchange Act of 1934 (the Exchange Act). In his answer, the CFO asserts (i) a right to “contribution” based on the wrongdoing of other “individuals and entities” and (ii) reliance on the advice of Acreage’s legal counsel. The SEC moved to strike, arguing that these affirmative defenses were not viable.
With respect to the “contribution” defense, the court denied the motion despite expressing doubt that the CFO even had a true contribution defense. Usually, contribution is not an affirmative defense to an existing claim, but a new claim that the defendant brings against other wrongdoers responsible for the alleged misconduct. Procedurally, the SEC argued, defendants are not entitled to bring such third-party claims in an SEC enforcement action. However, the court generously interpreted the CFO’s contribution defense to encompass other doctrines—such as contributory negligence—that seek to excuse the defendant’s actions based on the conduct of others. The court further noted that, if others were at fault, those facts might justify reducing the amount of any penalty to impose on the CFO. Ultimately, the court concluded, the motion was premature because the case was in the early stages of discovery.
The court also declined to strike the CFO’s reliance-on-counsel defense. As the SEC argued, a defendant typically needs to waive privilege to mount a reliance-on-counsel defense. Instead, both Acreage (which controlled the privilege, since the legal advice came from Acreage’s lawyers) and the CFO had asserted privilege during the SEC’s investigation. Moreover, the CFO had not even approached Acreage to request a privilege waiver. But here too, the court found the SEC’s argument premature. Discovery in the civil action had just begun, and the SEC had not yet requested a single document from the CFO. Thus, the CFO still had time to obtain a waiver of privilege from Acreage. However, the court ordered the CFO to provide an update to the SEC within 40 days on the status of his defense and efforts to waive privilege.
The decision highlights the importance of defense counsel vigorously asserting available defenses in SEC enforcement actions, and the willingness of courts to let defendants explore those defenses in discovery even if they may not ultimately prove meritorious.